Where will Mortgage Rates go from here?

After the Bank of Canada announced last month that it would be standing pat on interest rates (for now), mortgage holders are wondering what’s next. Is it time to lock in? If renewal is in your future, should you choose variable or fixed? How high are rates going to go—and how much should you set aside in your monthly budget for mortgage payments?

Many of the answers to these questions depend on your particular situation—both today and in the future.

After raising interest rates at each of its previous two meetings, the Bank of Canada on Wednesday took a pause and left its overnight rate at 1.00%, citing concerns about NAFTA renegotiations and a strengthening dollar. Since the BoC raised rates at its July and September meetings, variable rate holders have seen their mortgage carrying costs increase since those mortgages fluctuate based on prime rate, which is influenced by the central bank’s overnight target rate. “Competitive variable rates have risen a smidge over 30 bps since the BoC started tightening this summer,” noted Robert McLister, who dissects mortgage rates at RateSpy.com. “That’s less than two rate hikes. The reason it’s less than two hikes is because discounts from prime have noticeably improved.” McLister says that for an average borrower, every 1/4-point hike translates into more than $1,100 extra interest over five years, for every $100,000 of mortgage.

Where Do Rates Go From Here?

While most rate hike forecasts have been revised down, the market is still pricing in two rate hikes in 2018. But as CIBC economist Nick Exarhos wrote in a research note, it appears the BoC is back on the sidelines for now. “The Bank of Canada wants to monitor how its interest rate hikes will impact the economy, and as a result it will be ‘cautious’ with further increases in the overnight rate,” he wrote. CIBC is one of the banks forecasting 50 bps in rate hikes by the end of 2018. BMO, by contrast, is sticking to its call for a further 100 bps of tightening, though economist Doug Porter noted a rate hike in January would postpone further BoC action by a quarter, and in that case result in 75 bps of cumulative tightening by the end of next year. However, McLister said that while GDP is currently stronger than expected, inflation is not, which is why he believes aggressive tightening next year is unlikely. “Unless inflation hurtles to 2% in short order, more than 1-2 hikes next year is ambitious,” he said.

What Does This Mean for Mortgage Holders?

While mortgage rates have edged up following the last two Bank of Canada rate hikes, they are still relatively low by historical standards. Some of the best deals right now are to be found in short-term fixed and variable rates. “If you can save 3/4% in a short-term fixed or variable, that’s the play to make,” says McLister. “But you should be risk tolerant, given we may see more hikes, be able to qualify under the new stress test, and have a minimum of three to four months of living expenses on tap.” A recent report from Scotiabank warned that mortgage carrying costs could increase in the next two years due not only to rising rates, but new mortgage regulations. “Under our base-case forecast for interest rates, and assuming relatively stable home prices, average mortgage carrying costs for new buyers are projected to rise by about 8% in 2018 and by a further 4% in 2019,” the bank noted. “Further rule changes, including more stringent stress tests for uninsured mortgages…(could) exert additional drag on new buyers.” The Bank of Canada’s next rate decision will be made on December 6.

Summary

So, to summarize, economists and pundits believe the Bank of Canada is going to hike interest rates in 2018. What they can’t seem to agree on is how many hikes it’s going to make. The market is still expecting at least two rate hikes next year. CIBC believes the bank will be cautious and see how existing hikes play out—which it predicts will result in a 50 bps hike in interest rates by the end of next year. BMO, on the other hand, is predicting between 75 to 100 bps in hikes. Still, other experts predict that with NAFTA hanging in the balance and inflation still a ways off from the Bank’s 2% target, more than one to two hikes next year will be ambitious.

Bottom line: no one knows. No one knows what’s going to happen to the global economy, or if some unexpected factor is going to throw the Canadian economy off-course. So, if you’re concerned, your best bet is to weigh the pros and cons with me, and then make the move you’re most comfortable with.